OREANDA-NEWS. Fitch Ratings says that there is no impact on China-based Yanzhou Coal Mining Company Limited's (Yancoal, BB-/Negative) ratings from its offer to repurchase part of the US dollar bonds issued by Yancoal International Resources Development Co., Limited (YIR). The offer price is below the notes' par value; we deem this offer to be opportunistic. The repurchase will slightly reduce the company's interest expenses and total debt.

Yancoal on 16 November unveiled an offer to repurchase up to USD250m in principal amount of the USD550m 5.73% 2022 notes issued by its indirectly wholly owned subsidiary, YIR. Yancoal offered to repurchase the bonds at between USD860 and USD895 per USD1,000 principal amount.

The bond repurchase will only make a small dent in Yancoal's consolidated gross debt of CNY69bn (USD11bn) as of 30 September 2015. If it proceeds to buy back all USD250m of the bonds, Yancoal could save around USD14m a year in interest expense, accounting for 5% of its total interest payments in 2014. If Yancoal chooses to refinance the bond domestically in the future, it is likely to secure a lower interest rate compared with the 5.73% on the US dollar bond. This is due to Yancoal's status as a state-owned enterprise, which gives it good access to the domestic capital market.

Yancoal plans to use cash on hand to buy back the bonds. Fitch expects Yancoal to have adequate financial resources for the repurchase, which will not impair the company's liquidity, a major support to the company's ratings. The company had a strong cash position of over CNY21bn (USD3.4bn) at 30 September 2015 on a consolidated basis, and the repurchase of all USD250m of the bonds will consume less than 7% of Yancoal's cash.

Fitch downgraded Yancoal's Long-Term Issuer Default Rating (IDR) to 'BB-' from 'BB+' in April 2015, reflecting the substantial deterioration of its cash generation capacity and credit metrics under the weak domestic and regional coal market conditions. In addition, further room for cost savings by Yancoal is fairly limited while its capital expenditure will remain elevated in the next two years. Yancoal's good access to sources of funds - arising from its status as a provincial state-controlled enterprise, and its strong liquidity buffer against its short-term obligations, are the key factors supporting its 'BB-' IDR.